Differences between fixed and adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for a fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Reliance Mortgage Service, Inc at 562 320-0510 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, so they can't go up over a specific amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often have the lowest rates at the beginning of the loan. They guarantee that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 562 320-0510. We answer questions about different types of loans every day.